>>> US Close Dow -2.34% S&P -2.19% Nasdaq -2,28% Russell -1.92%


Closing Summary: Trade Concerns Drive Friday Fallout

The stock market closed the week on a decidedly lower note, falling victim to fears about potential trade wars, the Federal Reserve's tightening bias, and the specter of earnings growth not living up to this year's high expectations.  The Dow, Nasdaq, S&P 500, and Russell 2000 declined between 1.9% and 2.3% in Friday's trade.

Things got off to a bad start following the news that President Trump ordered the Office of the U.S. Trade Representative to consider whether it would be appropriate to impose an additional $100 billion of tariffs on Chinese imports on top of the proposed $50 billion of tariffs announced on Wednesday.

China quickly responded, saying it would do what is necessary to protect its interests at any cost if the U.S. ultimately pressed ahead with such a tariff plan.

What rattled the stock market, though, was the feistier-sounding nature of administration officials today discussing the new proposal, as well as their seeming lack of concern about the difficulties the stock market has been having on account of the heated trade rhetoric between the U.S. and China.

President Trump noted that the stock market might have to have a little pain as he works to protect the trade interests of the U.S.; meanwhile, Treasury Secretary Mnuchin said in a CNBC interview that he is not focused on short-term market swings and that there is potential of a trade war with China even though that is not the objective.

The major indices rolled over after Mr. Mnuchin's comments and then cascaded even lower after Fed Chair Powell said he thinks inflation will pick up this Spring and that he sees further gradual rate hikes.

In essence, the stock market didn't get the verbal support it has been accustomed to receiving from leading officials in periods of uncertainty.  Ironically, that fed a heightened sense of uncertainty about the outlook for the economy and earnings that kept many buyers on the sidelines and Friday's sellers focusing their efforts on the economically-sensitive sectors.

Every sector ended with a loss.  The industrials sector (-2.7%) suffered the largest decline, but it had ample company. 

The information technology (-2.5%), financial (-2.4%), materials (-2.4%), and health care (-2.4%) sectors all underperformed while losses in the consumer discretionary (-2.1%) and energy (-1.8%) sectors also weighed heavily.

The Dow Jones Industrial Average fell as many as 767 points on Friday before paring its losses in late action.  That recovery effort coincided with a bounce in the S&P 500 after it breached its 200-day moving average (2594).  Once again, though, the violation of that key technical level brought out the buyers who succeeded in pushing the S&P 500 back above the 200-day moving average by the closing bell.

The trade issues dominated the market narrative on Friday, but there was more to the story.  The March employment report provided its own twist for the market.

It showed a surprisingly weak 103,000 gain in nonfarm payrolls and a sturdy 0.3% increase in average hourly earnings.  All in all, it was a mixed report, yet it didn't alter the market's thinking about monetary policy other than making it think there was a diminished probability of a fourth rate hike in December.

The CME FedWatch Tool now pegs the probability of a fourth rate hike in December at 24.4% versus 32.7% on Thursday. 

Reviewing Friday's economic data, which was limited to the Employment Situation Report for March and the Consumer Credit Report for February:

  • March nonfarm payrolls increased by 103,000 (consensus 175,000). March private sector payrolls increased by 102,000 (consensus 180,000). March unemployment rate was 4.1% (consensus 4.0%) versus 4.1% in February. March average hourly earnings were up 0.3% (consensus 0.2%), after increasing 0.1% in February.  Over the last 12 months, average hourly earnings have risen 2.7%, versus 2.6% for the 12 months ending in February.
    • The key takeaway from the report is that it was neither too hot nor too cold to provide a clear basis for the Federal Reserve to re-think its outlook for monetary policy. At the same time, it will temper the market's concerns about the prospect of a fourth rate hike this year in December.
  • Total outstanding consumer credit increased by $10.6 billion in February (consensus $15.0 billion) after increasing an upwardly revised $15.6 billion (from $13.9 billion) in January.
    • The growth in February was driven almost entirely by nonrevolving credit, which was up $10.5 billion from January to $2836.6 billion.

There is no economic data of note on Monday.

  • Nasdaq Composite: +0.2% YTD
  • Russell 2000: -1.4% YTD
  • S&P 500: -2.6% YTD
  • Dow Jones Industrial Average: -3.8% YTD

>>> AkzoNobel considers M&A options; remains averse to foreign takeover

AkzoNobel considers M&A options; remains averse to foreign takeover
06 APR 2018
  • Akzo to use the momentum of the specialty sale for acquisitions
  • Revival of Axalta talks may be next step
  • Any major deal likely to have share component

AkzoNobel [AMS:AKZA] is exploring several tracks for potential transactions after agreeing the sale of its specialty chemicals unit, but remains averse to a foreign takeover, according to a source close to the company and a source briefed on the matter.
A new takeover approach for Akzo from PPG [NYSE:PPG] or Axalta Coatings [NYSE:AXTA] is very likely, according to three sector bankers and a Dutch lawyer. It is undeniable that PPG will try again; and after the separation of the specialty chemicals, Akzo will probably be an easier target for PPG, the lawyer speculated.
With Akzo as a pureplay paints and coatings company, it would not be surprising to see several different scenarios, with a deal possibly taking "several shapes and forms", the first banker said. A likely scenario could be Axalta and Akzo pursue an all-stock merger and then PPG would top it with a cash bid, but this time it would have to be friendly, the banker speculated.
A new approach from PPG is indeed expected, the source close agreed, conceding that it was very poorly handled the last time around.
In June last year, PPG abandoned its pursuit of Akzo after the Dutch company consistently rebuffed its proposals. The company also faced significant political opposition to its unsolicited approach. Under Dutch takeover law, PPG faced a six-month cooling-off period, which expired in December, enabling it to now make a renewed approach.

Yet, almost a year later, the anti-foreign hostile takeover sentiment has not changed in the Netherlands, the sources and the lawyer concurred.
Despite its latest transaction to sell the specialty chemicals unit to US private equity fund Carlyle Group and Singaporean sovereign wealth fund GIC, Akzo is still very much a Dutch business and wants to remain that way, the source briefed said. This deal was very much "a one-off", he said. The drivers for this deal were different, with Akzo having to return cash to their investors one way or another, the source continued. It did not mean Akzo was more open to a foreign takeover, he added.

On 27 March, Akzo announced the sale of 100% of its specialty chemicals business to Carlyle Group and GIC for an enterprise value of EUR 10.1bn. The transaction is expected to be completed before the end of 2018.

What is for certain is that Akzo will not remain an independent company, a second banker said. There will be a merger of some sort and there are several people interested, this banker said.
The company has been significantly undermined by the way it poorly managed the hostile approaches from PPG and nobody believes in a standalone strategy that would be long-lasting and competitive, he argued. Akzo will not last a day as a stand-alone company, this banker said.
Akzo does not have new defence mechanisms in place should PPG made an approach again, but its best defence remains an active management that delivers the best results for its shareholders and stakeholders, the source close said.

Following the agreement to sell specialty chemicals, Akzo is looking at every possible option for its paintings and coatings business, the sources said.

Things are likely to move rather quickly, with Akzo using the momentum from the successful sale of its specialty chemicals unit to restore its reputation and reposition its business, the source briefed said. The deal had a tremendous impact on its share price, which positions it in the driving seat again, the source close added.

Akzo CEO, Thierry Vanlancker, said during a conference call on 27 March, that the company is looking at possibilities to grow including bolt-on acquisitions, adding that larger acquisitions are possible, but the company would need to go back to their shareholders for approval.

Reviving merger talks with Axalta could be the next step on Akzo’s to-do list, the second banker said.
On December 15, Axalta executive vice president and CFO Robert Bryant said that the company will keep the door open for new merger talks with Akzo. Previous merger negotiations between the two companies failed after Axalta received a takeover bid from Japanese competitor Nippon Paint [TYO:4612], which ultimately did not come to fruition.

A merger with Axalta would be a huge deal and will likely include a stock component, with Akzo taking the lead, a third banker said.

The vast majority of net proceeds from the sale of the specialty chemicals will be distributed to shareholders, so a major acquisition with a cash offer is unlikely in the short term, the source close said.

If Axalta and Akzo were to merge, they would be required to shed some powder coatings assets to get any deal past the European Commission (EC), as previously reported by this news service.
In addition, the two companies are in two different parts of the world and a merger of equals would be rather difficult to implement, the lawyer said. The Dutch element will have to be prevalent should a merger with Axalta be explored again, but the deal will likely face cultural and implementation issues, he warned.

PPG and Axalta declined to comment.

Akzo is currently focused on delivering its next strategy plan to get a 15% return on sales by 2020, a spokesperson for Akzo said.

>>> US Gapping down


Gapping down
In reaction to disappointing earnings/guidance:

  • WDFC -2.3%, (Ethan Allen sees Q3 revenue below estimates ahead of April 10 Investor Meeting), ETH -1.5%

Select China related names showing weakness:

  • NTES -2.9%, JD -2.1%, WB -2.1%, BIDU -2%, FXI -1.9%, BABA -1.6%

Select fan favorites showing early weakness:

  • NVDA -1.8%, NFLX -1.7%, AAPL -1.5%, GOOG -1.3%, FB -1.3%

Other news:

  • NLNK -33.3% (after IDO peer Incyte (INCY -- halted) announced that its Phase 3 ECHO-301/KEYNOTE-252 study evaluating epacadostat in combination with KEYTRUDA)
  • INCY -18.0% (External Data Monitoring Committee determined that the Phase 3 ECHO-301/KEYNOTE-252 study did not meet the primary endpoint)
  • MNKD -15.5% (announces $28.0 mln registered direct offering)
  • CDXS -9.3% (priced offering of 3,750,000 shares of its common stock at a public offering price of $9.25/share)
  • NEWM -8.7% (priced public offering of 6 mln shares of its common stock for gross proceeds of ~$99 mln)
  • NOG -7.5% (prices public offering of 58,666,667 shares of its common stock at $1.50 per share)
  • MU -3.9% (continued weakness following Fast Money comments and yesterday's UBS Sell rating)
  • GERN -2.5% (continued weakness)
  • ORBC -2.4% (announces 3 million share stock offering and sees Q1 sales slightly below consensus)
  • TSLA -2.2% (modestly pulling back as reports ciculate related to fire on Tuesday/temporary production halt)
  • MRK -2.1% (INCY and MRK reported External Data Monitoring Committee determined that the Phase 3 ECHO-301/KEYNOTE-252 study did not meet the primary endpoint)
  • AMZN -1.7% (President Trump in press gaggle with reporters aboard Air Force One says AMZN is not on a level playing field; says will study options on what changes he can make to level that playing field)
  • URBN -1.4% (Urban Outfitters CEO of Anthropologie Group and President David McCreight will leave on April 27, 2018)
  • FE -1% (8point3 Energy detailed impact from anticipated FirstEnergy Solutions Maryland Solar Project termination )
  • CRZO -0.9% (responds to Kimmeridge; will only pursue opportunities if deemed accretive and in the best interest of all shareholders)

Analyst comments:

  • RUN -6.5% (downgraded to Underperform from Buy at BofA/Merrill)
  • XLNX -3.8% (downgraded to Underweight from Neutral at JP Morgan)
  • RIO -1.9% (downgraded to Neutral from Outperform at Exane BNP Paribas)

>>> US Gapping up


Gapping up
In reaction to strong earnings/guidance:

  • GBX +3.4%, PSMT +2.2%

M&A news:

  • WYNN +1.8% (MGM Resorts (MGM) considering purchase of WYNN, according to NY Post)

Other news:

  • GCAP +3.3% (announced the continued rollout of the Company's cryptocurrency offering)
  • WAGE +2.1% (appoints Edgar Montes as CEO, Colm Callan will resign as CFO; to restate certain financial results - not expected to affect business operations)

Analyst comments:

  • VRX +0.5% (upgraded to Neutral at Mizuho)

>>> US Early premarket gappers


Early premarket gappers

Gapping up:

  • GCAP +3.6%, GBX +3.1%, PSMT +2.2%

Gapping down:

  • CDXS -11.2%, NEWM -10.1%, MU -3.4%, GERN -2.5%, ORBC -2.4%, TSLA -2.3%, WDFC -2.3%, ETH -1.5%, URBN -1.4%, I -1.4%, CRZO -0.9%